Turn Allowance Into Wealth: How Dentists Can Fund Roth IRAs for Kids

Dentists work tirelessly to build profitable practices, but when it comes to taxes and long-term wealth, many miss one of the simplest strategies available: using your practice payroll to create tax-free retirement accounts for your kids.

Instead of handing over an allowance, what if you could legally pay your children through the practice, save thousands in taxes, and put them on a path to financial independence—before they even graduate college?

That’s where Roth IRAs for kids come in. By combining payroll wages with Roth IRA contributions, you can give your children the gift of lifelong tax-free growth. Here’s how it works and why every dentist should consider it.

Why Roth IRAs Are a Secret Weapon for Kids

Most people think of Roth IRAs as retirement accounts for adults, but they’re actually one of the most powerful tools you can give your kids—if they have earned income.

Key benefits:

• Tax-free growth: Investments inside a Roth IRA grow tax-free. No annual tax on dividends, no capital gains tax when sold.
  
• Tax-free withdrawals: Once your child reaches retirement age, they can pull out the money tax-free.
  
• Flexibility: Funds can also be used (with some conditions) for education expenses, first-time home purchases, or emergencies.
  
• Compounding over decades: The earlier you start, the more exponential the growth.
  

When paired with the “kids on payroll” strategy, Roth IRAs become even more powerful.

Step 1: Establish Earned Income

The IRS only allows Roth IRA contributions if the child has earned income. That means mowing lawns, babysitting, or, in the case of dentists—working in your practice.

When you put your kids on payroll and pay them W-2 wages:

• Those wages qualify as earned income.
  
• Your child becomes eligible to contribute to a Roth IRA.
  
• You, as the parent, can set up and manage the custodial account on their behalf.
  

In 2025, the maximum Roth IRA contribution is $7,000 per year for anyone under age 50—including your kids.

Step 2: Pay Through Payroll

Your children need to be paid as W-2 employees, not contractors. This means:

• Add them to your payroll provider.
  
• Pay them regularly (monthly or bi-weekly looks better than one lump sum).
  
• Keep documentation of their work (cleaning, filing, modeling for office photos, etc.).
  

You can pay each child up to $15,750 in 2025 without triggering federal income tax, thanks to the standard deduction. From there, you can allocate up to $7,000 of their wages into a Roth IRA.

Step 3: Open a Custodial Roth IRA

Since minors can’t open accounts on their own, you’ll set up what’s called a custodial Roth IRA.

• You act as custodian and control the account until your child reaches legal adulthood (18 or 21, depending on the state).
  
• You choose the investments inside the account.
  
• The money legally belongs to your child but is locked inside the Roth IRA until retirement (with some exceptions).
  

Most major brokerages like Vanguard, Fidelity, and Charles Schwab make it easy to open a custodial Roth IRA.

Step 4: Fund the Roth IRA Each Year

Now comes the magic. Out of your child’s W-2 income, contribute up to $7,000 annually to their Roth IRA.

You don’t need to overcomplicate it. A simple annual transfer from your family checking account into the Roth IRA (before April 15 of the following year) is all it takes.

This contribution can come from the wages they earned—even if you’re the one actually moving the money.

Step 5: Let Time Do the Heavy Lifting

Here’s where this strategy shines: the power of compounding over decades.

Let’s run some numbers:

• Start contributing $7,000 per year when your child is 10 years old.
  
• Continue until age 25 (15 years of contributions).
  
• At a conservative 8% return, that account will grow to about $384,000 by age 25.
  

Now, here’s the kicker:

If your child leaves the Roth IRA untouched until retirement, that $384,000 could grow to over $3 million by age 65—completely tax-free.

That’s more than many practicing dentists have at retirement, all because you took advantage of an IRS-approved strategy early.

Step 6: Consider Investment Choices

What should go inside your child’s Roth IRA? Since this money is meant for the very long term, growth-oriented investments make the most sense.

• Broad stock index funds (like Vanguard Total Stock Market Index)
  
• International funds for diversification
  
• Small-cap or emerging market funds for higher long-term growth potential
  

Because Roth IRAs are tax-free, you don’t need to worry about dividends or capital gains taxes—making them the perfect home for aggressive, high-growth assets.

As your child gets closer to using the money (for school, a first home, or retirement), you can gradually shift toward more conservative investments.

Step 7: Roth IRA vs. 529 Plans

Some dentists ask: Why not just use a 529 plan for education savings?

Both accounts have advantages, but Roth IRAs often come out ahead:

• Roth IRA flexibility: If your child doesn’t need the money for school, the account can keep growing for retirement.
  
• 529 restrictions: Funds must be used for qualified education expenses, or you’ll pay taxes and penalties on withdrawals.
  
• Dual-use option: You can split contributions—put some into a Roth IRA, some into a 529—for maximum flexibility.
  

Many dentists choose to prioritize Roth IRAs first, since they provide tax-free retirement growth in addition to the option of education funding.

Step 8: Teach Kids About Money

One of the hidden benefits of this strategy is financial education. When kids see a paycheck with their name on it, they start to connect work with earnings.

You can use this opportunity to:

• Teach them about saving and investing.
  
• Show them how their Roth IRA grows over time.
  
• Instill good money habits before they reach adulthood.
  

Instead of simply handing them an allowance, you’re giving them a real paycheck, a retirement account, and a foundation of financial literacy.

Real-Life Example: The Dentist With Three Kids

Let’s imagine a dentist with three children, ages 8, 12, and 15.

• Each child is paid $15,750 in 2025 through the practice.
  
• Tax savings: ~$11,000 total after payroll taxes.
  
• Each child contributes $7,000 into a Roth IRA.
  

At the end of the year, the family has:

• $21,000 invested into Roth IRAs for the kids.
  
• $11,000 in annual tax savings that stays in the household.
  
• A long-term plan that could easily grow into millions in tax-free wealth.
  

All while teaching the kids valuable lessons about work, savings, and responsibility.

The Big Picture

As a dentist, you’re already working long hours to build financial security. This strategy doesn’t add more stress or complexity—it simply reroutes money you’re already earning in a way that saves taxes and builds family wealth.

Here’s the formula:

1. Put kids on payroll.
   
2. Pay up to $15,750 (2025 standard deduction).
   
3. Contribute $7,000 per child into a Roth IRA.
   
4. Let time and compounding do the rest.
   

It’s not a loophole—it’s smart planning. And it could be one of the most impactful financial decisions you make for your family’s future.

Final Thoughts

Turning allowance into wealth is more than just a catchy phrase. For dentists, it’s a real, practical strategy to reduce taxes, fund your kids’ future, and build generational wealth.

Instead of giving your kids $20 a week for chores, imagine giving them a retirement account that could one day be worth millions—all while saving you thousands on taxes every year.
Want to learn exactly how to set this up and avoid IRS pitfalls?

Listen to Episode 128 of The Dental Boardroom Podcast